ANALYSIS|ISPs Fear AT&T Will Corner Market
By Nate Zelnick
Internet service providers could be caught in a squeeze after AT&T made another dramatic move last week toward
offering telephony, cable television, and broadband Internet access.
AT&T's multibillion-dollar investments in cable--first in the pending acquisition of Tele-Communications Inc. and then
last week in a joint venture with Time Warner Cable (TWC)--promises to topple the already teetering balance
between ISPs and local telephone companies.
While primarily oriented toward new telephone services, the AT&T/ TWC joint venture is part of a larger AT&T
effort to offer a panoply of IP-based communications services under the AT&T brand.
Under the terms of the deals, AT&T will be able to offer telephone, wireless, cable television, and broadband
Internet access to 40 percent of U.S. households "within four to five years," according to AT&T.
What's terrifying to competitors is that none of these new services fall under the regulations covering local telephone
service, and they fear they could be blocked from offering similar services because it's too expensive to duplicate the
infrastructure.
A coalition of ISPs, together with America Online, had already been fighting the AT&T acquisition of TCI on the
grounds that broadband services would be sold exclusively through @Home Networks, of which AT&T will be the
largest shareholder if the TCI deal goes through.
AOL said it will be at a disadvantage to compete with @Home's community and content services, including those
offered by Excite. @Home is acquiring Excite and plans to bundle the portal's content to @Home's customers.
AOL and the ISPs in the coalition are unable to offer broadband cable services and have no rights under current
regulations to any of the existing cable infrastructure.
"This is starting to get to them," said Current Analysis researcher analyst Jilani Zeribi. "The ISPs have been screaming
that voice services over IP is just not going to work, and now they're also saying, 'But you have to let us have
access.'" And it gets worse.
Today, ISPs are able to reach customers over the existing telephone network, because telcos have to sell their
services at regulated rates and on a non-discriminatory basis. Thus, even though Bell Atlantic sells dial-up Internet
access, it is not allowed to charge more to competing ISPs. In the local loop, a phone line is a phone line, regardless
of whether it goes to an ISP or a residence or is intended as a data line or for voice.
ISPs thrived, and the Internet grew faster in the United States than in other countries, because of these rules. In most
of the United States, consumers can buy flat-rate service within their local loop, which means that an ISP can provide
service over residential lines without having to pay a per-minute charge.
Increasingly, ISPs turned to competitors in the local exchange (CLECs), a product of telecommunications
deregulation. The CLECs offer lower prices, better response time for new line orders, and the comfort of not
depending on a direct competitor in the ISP business.
CLECs love ISP business, because it is growing fast and Internet users generally don't receive phone calls on
Internet-dedicated lines. Under settlement rules between local exchange carriers (LECs) and CLECs designed to
repay local-loop service providers for use of each other's networks, CLECs make money from both the ISPs buying
their lines and from the LEC.
AT&T's movement into this market has threatening implications not just because it offers a new way for customers to
buy Internet access, but also because it has stimulated the sleepy phone giants into strong action. And the CLECs and
ISPs are finding that there may be limits to their access to Regional Bell Operating Companies' (RBOCs')
infrastructure as well.
After half a decade of trials and foot-dragging, RBOCs and LECs are beginning to add DSL services in a few
high-density, high-technology markets at rates competitive with cable modems. And last month the Supreme Court
ruled that RBOCs may not have to provide open access to these new services, leaving the CLECs and ISPs in the
lurch.
Other developments could cause further troubles for ISPs.
After having spun off its consumer-oriented Internet access service to Cable & Wireless to quell concerns about
undue dominance in Internet services seven months ago, MCI WorldCom announced last week that it is jumping
back in with a national consumer and business dial-up business.
Companies with rights-of-way to install fiber-optic lines see opportunities. Qwest Communications, for example, is
offering dial-up services. Fixed wireless, coming online in the foreseeable future, bypasses local exchange rules just as
cable does.
Lowell Gray, CEO of Shore.Net, an ISP based in Lynn, Mass., cautioned that some of the AOL/ISP coalition
complaints are overblown. "I'm looking forward to doing business with MediaOne," Gray said. "We're not and are
never going to be a provider of the last mile." 't have access to broadband cable? Let us know what you think, and
why, at letters@iw.com.
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